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Industry Snapshot – Financial: Bank of America, Wachovia, Citi, and WellsFargo

July 25, 2008 | About:
Jonathan D. Poland

Jonathan D. Poland

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I’d like to talk about four companies in particular. BAC, WB, C, WFC.

These are the countries leading banking institutions and they are all down between 40% - 60% this year alone. WOW! Warren Buffett owns BAC and is down 50% +, Eddie Lampert is in C and is down 50% + as well. So, don't feel too bad, these guys have been wrong so far with these companies too.

Now does that mean they are screaming buys or screaming sells or just telling you to stay away? I would like to present some facts, data, and ideas that might help if you already own these stocks.

The biggest thing with each of these companies is the amount of debt they have and their operating cash flow. Here are some basic facts about each of them...

Market Cap

Revenue

Income

Cash Flow

BAC

86.96 B

52.01 B

10.61 B

26.84 B

WFC

71.37 B

32.26 B

7.81 B

3.86 B

WB

19.36 B

25.09 B

3.30 B

(9.08) B

C

79.43 B

48.99 B

(6.61) B

(51.43) B

 

 

 

 

 

 

 

 

Income

Debt

Total Cash

Book Value

BAC

10.61 B

613.39 B

335.30 B

31.27

WFC

7.81 B

157.16 B

25.24 B

14.45

WB

3.30 B

230.66 B

101.18 B

36.74

C

(6.61) B

840.32 B

921.60 B

22.74

Now, Jim Cramer would have you believe that The Danger is Immense on the whole sector. Just read a recent article from The Street.com. This is the reason I started typing again!

Article Link

One moment on good ole Jim Cramer; in 2000 he not only shunned investment methods set down by Benjamin Graham, but he proclaimed that internet related companies "are the only ones worth owning right now." These "winners of the new world" as Cramer aptly named them, "are the only ones that are going higher consistently in good days and bad."

It is this kind of SHORT SIGHTED mentality that does not produce wealth. What it does produce is risk, tax liabilities, and the occasion gain. As for Cramer’s favorites back in 2000… by the end of 2002, a $10,000 investment would have been worth $597.44 – down over 94%. How can anyone believe his opinion now?

The only reason I am even writing about this is because now there is a large audience following Cramer and his opinions on a regular basis. Unfortunately, when too many folks start really listening is when bad stuff happens.

In my opinion these financial companies are solid. With many offering good dividends and cheap prices and if can hold your nose and take your medicine then you’ll be better off down the road. Remember that investing is a marathon, not a sprint and if you’re looking to invest over a 10 or 20 year period, short term volatility should not scare you. It should excite you!

___________________________________________

Jonathan D. Poland is the Founder & Chairman of the PigsGetRich Investment Network. www.pigsgetrich.com

About the author:

Jonathan D. Poland
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Comments

pshah19
Pshah19 - 5 years ago
Completely agree with the author's opinion of Cramer.

However, the author should also realize that his basket of bank stocks has not been a very good investment since 2000 either. Only WFC is up about 40% since Jan 2000. BAC is about flat, while Wachovia is down about 50% and Citi is down about 55% - all since Jan 2000. An equally-weighted portfolio of these would be down 15%.

This is not counting dividends but that's not much solace.
softdude2000
Softdude2000 - 5 years ago
I agree with general tone but I have to point out WEB owns very minute fraction in BAC. By his standards few thousands do not stand as an endorsement of BAC.
buffetteer17
Buffetteer17 premium member - 5 years ago
All these are in my bank smorgasbord. The smorgasbord is down 53% at the moment. That's actually great, cause it was down 81% two weeks ago ;-)
texalope
Texalope - 5 years ago
Graham also said you are right or wrong based on your analysis of the facts. In the case of these institutions the true value of their assets is unknowable- even to them- my proof is their repeated write downs and increased reserves.

investing at this point is speculation. I don't think that's bad, I just thing your eyes should be open. Book Values are suspect. Many investors don't believe them and that's why the prices are at or below book.I for one have lost a ton of money betting that these stocks where cheap only to find they got cheaper and lowered their book value each quarter as they reported mounting losses.
buffetteer17
Buffetteer17 premium member - 5 years ago
I cannot evaluate banks. I admit it. But it seemed to me, as a gut feeling, that the writedowns of assets were overdone. Some of the mortgage CDOs were priced as if the default rate would be 40%. Here we are in the depths of the mortgage crises, and default rates are well below 10%, even in sub-prime. That is still a lot of defaults, of course.

So, wanting to cash in, I checked what big banks were popular with the gurus. I picked 7 of these, BAC, C, COF, JPM, STI, USB, and WFC. Rather than buy shares, I bought slightly out of the money LEAPs. Surprises in financial companies tend to be mostly unpleasant surprises. With a LEAP you pay only a small fraction of the cost of a share. Your worst case loss is what you paid, but your leverage on improvements is enormous, typically 4x or more. I figured that if just a couple of the seven work out, I'd make money.

The bank smorgasbord was started in Nov-Dec. 07. And of course every single one of the big banks tanked badly in the next 6 months. I did some averaging down, a little too much actually. In spite of this, I lost 82% of my investment. Fortunately, the total investment was not a large fraction of my portfolio. Unfortunately, it wasn't a tiny fraction...it ended up being about 8%.

What's worse, the intrinsic value of several of the banks has been reduced due to dilution of the shares. I may never recover my investment, which is currently down about 53%.


texalope
Texalope - 5 years ago
I.ve moved on. While I am partial to financial companies because they have plenty of free cash flow with low capex I've decided that at this point they are speculative with unknowable assets.

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